WHO’S GOT THE NOTE?

A NEW VERSION OF “WHERE’S WALDO?”

(MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:

MISSING ORIGINAL NOTES AND OTHER
PROBLEMS FOR CREDITORS)

R. GLEN AYERS

LANGLEY & BANACK

SAN ANTONIO, TEXAS

210-736-6600
gayers@langleybanack.com

STATE BAR OF TEXAS

ADVANCED CONSUMER BANKRUPTCY COURSE 2009

September 17-18 – Houston, Texas

(Video – October 15-16 – Dallas, Texas)

CHAPTER 17
 TABLE OF CONTENTS

I. MISSING NOTES .................................................................................................................................1

A. Persons Who May Enforce Notes – § 3-301 ...................................................................................1
B. UCC SECTION 3-309 .....................................................................................................................2
C. Who’s the Holder – The UCC Issues ..............................................................................................2
1. Generally .................................................................................................................................2
2. Brief Review of UCC Provisions ............................................................................................2
D. The Rules .........................................................................................................................................3
1. In Bankruptcy Court ................................................................................................................3
2. Standing and Party-in-Interest; the Difference Between Bankruptcy and District Court .......3
E. A Brief Aside: Who is Mers? .........................................................................................................4
F. Rules of Evidence – A Practical Problem .......................................................................................4
G. Foreclosure or Relief from Stay ......................................................................................................4
H. Relief from Stay Proceedings ..........................................................................................................5
II. OTHER PROBLEMS FOR THE FORECLOSING CREDITOR ...................................................6
A. Servicing Company Abuses ............................................................................................................6
1. Generally .................................................................................................................................6
2. The Texas and Other Fifth Circuit Cases ................................................................................7
III. THE ETHICAL ISSUE .........................................................................................................................7
A. The Lender .......................................................................................................................................7
B. The Debtor’s Counsel ......................................................................................................................7
IV. SUMMARY ............................................................................................................................................8
V. RECENT LEGISLATION – DOES IT MAKE A DIFFERENCE? .................................................8
VI. NOTE ON MADDENING COMPLEXITY OF SECURITIZATION .............................................8
 TABLE OF AUTHORITIES

Cases
Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL 111227 (S.D. Ohio) January 8, 2008..............................6
Greer v. O’Dell, 305 F.3d 1297, 1302-03 (11th Cir. 2002)...............................................................................4
HSBC Bank USA, N.A. v. Valentin, 21 Misc. 3D 1124(A), 2008 WL 4764816 (Table) (N.Y. Sup.)
November 3, 2008........................................................................................................................................7
HSBC Bank, N.A. v. Valentin, 2l N.Y. Misc. 3d 1123(A), 2008 WL 4764816 (Table) (N.Y. Sup.), Nov. 3,
2008..............................................................................................................................................................5
In re Allen, 2007 WL 174708 (Bankr. SD. Tex. 2007)....................................................................................8
In re Beers, 2009 WL 1025402 (Bankr. N.J. 2009).........................................................................................8
In re Cabero-Mejia, 402 B.R. 335 (Bankr. C.D. Ca. 2008).............................................................................8
In re Foreclosure Cases, 521 F.Supp. 3d 650, 653 (S.D. Ohio, 2007) (citations omitted)..............................4
In re Hayes, 393 B.R. 259 (Bankr. D. Mass. 2008).........................................................................................6
In re Hwang, 396 B.R. 757 (Bankr. C. D. Cal. 2008).....................................................................................3
In re Mounce, 390 B.R. 233 (Bankr. W.D. 2008)............................................................................................8
In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008)......................................................................................8
In re Pawson, Case No. 05-18239 (Bankr. S.D. N.Y. 2009.............................................................................7
In re Porcheddu, 338 B.R. 729 (Bankr. S.D. Tex. 2006).................................................................................8
In re Sanchez, 372 B.R. 289 (Bankr. S.D. Tex. 2007).....................................................................................8
In re Schwartz, 366 B.R.265 (Bankr. D. Mass. 2007)......................................................................................5
In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008)........................................................................................8
In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008) at 520............................................................................4
In re Wilburn, 404 B.R. 841 (Bankr. S.D. Tex. 2009).....................................................................................8
Liberty Savings Bank v. Redus, 2009 WL 41857 (Ohio App. 8 Dist.), January 8, 2009.................................3
Maxwell v. Fairbanks Capital Corp., (In re Maxwell), 281 B.R. 101 (Bankr. D. Mass 2002)........................7
Nosek v. Ameriquest Mortgage Company (In re Nosek), 286 Br. 374 (Bankr D Mass. 2008)........................6
U.S. Bank, N.A. v. Cook, 2009 WL 35286 (N.D. Ill. January 6, 2009)............................................................6
United States v. Butner, 440 U.S. 48 (1979)....................................................................................................2
Wells Fargo Bank, N.A. v. Byrd, 897 N.E.2d 722 (Ohio App. 1 Dist, 2008)...................................................5

Statutes, Rules & Secondary Sources

“Helping Families Save Their Homes Act of 2009”, Pub. L. No. 111-22, 123 Stat. 1632..............................8
“Why Toxic Assets are so Hard to Clean Up,” Wall Street Journal, A13 (June 20, 2009).............................8
15 U.S.C. § 1640(a) (2006)..............................................................................................................................8
F. R. Bankr. P. 9014.........................................................................................................................................3
F.R Civ. Pro. 11 (F.R. Bankr.Pro. 9011)..........................................................................................................7
F.R. Civ. Pro. 17...............................................................................................................................................4
F.R. Evid. 801...................................................................................................................................................4
F.R.Bankr.Pro. 4001.........................................................................................................................................3
F.R.Civ. Pro. 17................................................................................................................................................3
Porter, Katherine M., “Misbehavior and Mistake in Bankruptcy Mortgage Claims,” 87 Tex. L. Rev. 121
(2008)...........................................................................................................................................................1
Tex. Prop. Code §51.0001..............................................................................................................................4
T-I-L at § 404 (a)(1).........................................................................................................................................8
T-I-L at § 404 (a)(2).........................................................................................................................................8
Truth in Lending Act (“T-I-L”), 15 U.S.C. § 1641 et seq................................................................................8
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS
MORTGAGE FORECLOSURE IN AN AGE OF
SECURITIZATION: MISSING ORIGINAL
NOTES AND OTHER PROBLEMS FOR
CREDITORS
* Author’s Note: The first version of this paper was
prepared with Judge Samuel L. Bufford, United States
Bankruptcy Judge, Central District of California, Los
Angeles, California. That Paper, titled Where’s The
Note, Who’s The Holder?, was presented at the Spring
Meeting of the American Bankruptcy Institute in
Washington, D.C., April 3, 2009.
The second version was presented at the 2009
“Advanced Real Estate Law Court in July 2009. This
version contains references to the recently enacted
“Helping Families Save Their Homes Act of 2009.”
The research on this statute was done by Alan
Gretzinger, a third year law student at the University of
Texas School of Law.
INTRODUCTION
In an era where a very large portion of mortgage
obligations have been securitized, by assignment to a
trust indenture trustee, with the resulting pool of assets
being converted into and sold as mortgage backed
securities, foreclosure becomes an interesting exercise,
particularly where judicial process is involved. We are
all familiar with the securitization process. The steps,
if not the process, are simple. A borrower goes to a
mortgage lender. The lender finances the purchase of
real estate. The borrower signs a note and mortgage or
deed of trust. The original lender sells the note and
assigns the mortgage to an entity that securitizes the
note by combining the note with hundreds or thousands
of similar obligation to create a package of mortgage
backed securities, which are then sold to investors as
bonds. The mortgage note payments are those received
or “serviced” by an agent call a “servicing company.”
The total mortgage debt in the U.S. is about $14.6
trillion. There are approximately $8.9 trillion in
mortgage related securities. Around these financial
arrangements grew up a number of derivatives, the
most important of which is the swap, which allegedly
can be used to hedge risk but in fact can be used to
speculate on changes in the direction of price
1
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movement. The swap is an agreement of
counterparties to exchange cash flow streams (or
“legs”) based upon notional or nominal face amount
used to calculate payments. This is “notional,”
because the face value does not change hands. For
explanations of these transactions, see
www.enwikipedia.org/wiki/Mortgage-backed_security.
When derivatives such as swaps are taken into account,
then the entire volume of these investments probably
exceeded tens of millions of dollars before the collapse
of the home real estate bubble.
The vast flow of notes into the maw of the
securitization industry meant that a lot of mistakes
were made. When the borrower defaults, the party
seeking to enforce the obligation and foreclose on the
underlying collateral (usually the servicing company)
sometimes cannot find the note. A lawyer
sophisticated in this area has speculated to one of the
authors that perhaps a third of the notes “securitized”
have been lost or destroyed. There is little empirical
evidence, but what there is suggests that about forty
percent of the notes may be missing. Porter, Katherine
M., “Misbehavior and Mistake in Bankruptcy
Mortgage Claims,” 87 Tex. L. Rev. 121 (2008)
(hereafter “Porter at ___”).
Servicing companies are also notoriously slip-
shod in their accounting or bookkeeping and other
practices. See “Is Misconduct in Bankruptcy Fueling
the Foreclosure Crisis?” 27 Am. Bankr. Inst. J. 10, 42-
45 (June 2008). (The article quotes Prof. Porter’s
testimony before the US. Senate Judiciary Committee
in 2008.)
The cases discussed below certainly indicate very
starkly that both of these sources may be correct.
I. MISSING NOTES
A. Persons Who May Enforce Notes – § 3-301
Persons who may enforce notes under § 3-301
include two categories of persons who have possession
of the instrument: holders – persons in physical
possession with proper endorsements of order paper –
and transferees in possession who are not holders but
“have the rights of a holder . . . .” Only two categories
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS
of persons who do not have actual possession may
enforce a note. Those persons who qualify under §3-
309 and §30418(d). §3-309 covers lost or missing
notes and is discussed below.
§3-148(d) is very narrow in scope. Where an
instrument is paid by mistake and payment is either
recover or acceptance revoked by the payor, the
instrument “is deemed not to have been paid . . . and is
treated as dishonored and the person from whom
payment is recover has rights as a persons entitled to
enforce the dishonored instrument” even though he or
she does not have possession of the instrument. This
provision is designed to clarify the impact of certain of
the payment rules of Art. 4 dealing with checks.
Where the party seeking to enforce is only a
transferee, a few other sections and provisions must be
considered. A “transfer” is physical delivery intended
to give the transferee the right to enforce, including the
rights of a holder in due course. §3.203(a)&(b). In
order to enforce, then, a transferee must show physical
possession. A mere receipt showing transfer of
ownership is not enough. §3.203, comment 2. There
must also be evidence of intent to transfer enforcement
rights. Id., comment 2. If the transferee has no
endorsement, it can “shelter if it can show its transferor
was a holder or holder in due course.” Id., comment 3.
To summarize, ordinarily, except for §3-309, if a
person wants to enforce a note, he, she or it had better
be able to produce the original.
B. UCC SECTION 3-309
Where the note is simply missing, UCC §3-309
provides a simple solution. A holder or transferee is
entitled to enforce an instrument which has been lost,
destroyed or stolen may enforce the instrument. If the
court is concerned that some third party may show up
and attempt to enforce the instrument against the
payee, it may order adequate protection. But, and
however, a person seeking to enforce a missing
instrument must be a person entitled to enforce the
instrument, and that person must prove both the
instrument’s terms and that person’s right to enforce
the instrument. §3-309 (a)(1) & (b). To get there, the
person asserting rights under §3-309 must show that it
2
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is a person entitled to enforce under §3-301 and was, at
the time the instrument was lost, either a holder or a
transferee under §3-301.
C. Who’s the Holder – The UCC Issues
1. Generally
Enforcement of a note always requires that the
person seeking to collect show that it is the holder or a
transferee who took from a holder. A holder is an
entity that has acquired the note either as the original
payor or transfer by endorsement of order paper or
physical possession of bearer paper. These
requirements are set out in Article 3 of the Uniform
Commercial Code, which has been adopted in every
state, including Louisiana, and the District of
Columbia. Even in bankruptcy proceedings, State
substantive law controls the rights of note and lien
holders, as the Supreme Court pointed out almost forty
years ago in United States v. Butner, 440 U.S. 48, 54-
55 (1979).
However, as Bankruptcy Judge Bufford has
recently illustrated, in the cases discussed below, in the
bankruptcy and other federal courts, procedure is
governed by the Federal Rules of Bankruptcy and Civil
Procedure. And, procedure may just have an impact on
the issue of “who,” because, if the holder is unknown,
pleading and standing issues arise.
2. Brief Review of UCC Provisions
Article 3 defines what a negotiable instrument is
and defines how ownership of those pieces of paper is
transferred. For the precise definition of “negotiable
instrument”, see § 3-104(a) (“an unconditional promise
or order to pay a fixed amount of money, with or
without interest . . . .”) The instrument may be either
payable to order or bearer and payable on demand or at
a definite time, with or without interest.
Ordinary negotiable instruments include notes and
drafts (a check is a draft drawn on a bank). See § 3-
104(e).
Negotiable paper is transferred from the original
payor by negotiation. §3-301. “Order paper” must be
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS
endorsed; bearer paper need only be delivered. §3-
305. However, in all cases, for the note to be enforced,
the person who asserts the status of the holder must be
in possession of the instrument. See UCC § 1-201 (20)
and comments.
The original and subsequent transferees are
referred to as holders. Holders who take with no notice
of defect or default are called “holders in due course,”
and take free of many defenses. See §§ 3-305(b).
Transferees who take under § 3-301 – persons that
the holder intends to have the rights the holder has –
are not helped in the context of the missing note
problem. While a transferee can certainly utilize
§3.309, the transferee who has lost possession, like a
holder who has lost possession, must prove the terms
of the instrument and that it has the right to enforce
(e.g., is an agent, etc.). In other words, both must
prove actual receipt and possession and not just some
transfer of title without evidence of transfer of
possession. The proof is obviously the same as the
proof required under §3.309, so where the instrument
cannot be found, §3-203 and 3-301 add nothing to
§3.309.
NOTE: Those who went through the bank and
savings and loan collapse of the 1980’s are familiar
with these problems. The FDIC/FSLIC/RTC sold
millions of notes secured and unsecured, in bulk
transactions. Some notes could not be found and
enforcement sometimes became a problem. Of course,
sometimes we are forced to repeat history. For a recent
FDIC case, see Liberty Savings Bank v. Redus, 2009
WL 41857 (Ohio App. 8 Dist.), January 8, 2009.
D. The Rules
1. In Bankruptcy Court
Judge Bufford addressed Rules of Procedure
issues this past year. See In re Hwang, 396 B.R. 757
(Bankr. C. D. Cal. 2008). First, there are the pleading
problems that arise when the holder of the note is
unknown. Typically, the issue will arise in a motion
for relief from stay in a bankruptcy proceeding.
3
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According F.R.Civ. Pro. 17, “[a]n action must be
prosecuted in the name of the real party in interest.”
This rule is incorporated into the rules governing
bankruptcy procedure in several ways. As Judge
Bufford has pointed out, for example, in a motion for
relief from stay, filed under F.R.Bankr.Pro. 4001 is a
contested matter, and is governed by F. R. Bankr. P.
9014, which makes F.R. Bankr. Pro. 7017 applicable to
such motions. F.R. Bankr. P. 7017 is, of course, a
restatement of F.R. Civ. P. 17. In re Hwang, 396 B.R.
at 766. The real party in interest in a federal action to
enforce a note, whether in bankruptcy court or federal
district court, is the owner of the note. (In
securitization transactions, this would be the trustee for
the “certificate holders.”) When the actual
holder/owner of the note is unknown, it is impossible –
not difficult but impossible – to plead a cause of action
in a federal court (unless the movant simply lies about
the ownership of the note). Unless the name of the
actual note holder can be stated, the very pleadings are
defective.
2. Standing and Party-in-Interest; the Difference
Between Bankruptcy and District Court
Often, the servicing agent for the loan will appear
to enforce the note. Assume that the servicing agent
states that it is the authorized agent of the note holder,
which is “Trust Number 99.” The servicing agent is
certainly a party in interest, since a party in interest in a
bankruptcy court is a very broad term or concept. See,
e.g., Greer v. O’Dell, 305 F.3d 1297, 1302-03 (11th
Cir. 2002).
However, the servicing agent may not have
standing in the United State District Court, for the term
“party in interest” does not apply outside of the
bankruptcy context: “Federal Courts have only the
power authorized by Article III of the Constitutions
and the statutes enacted by Congress pursuant
thereto. ... [A] plaintiff must have Constitutional
standing in order for a federal court to have
jurisdiction.” In re Foreclosure Cases, 521 F.Supp. 3d
650, 653 (S.D. Ohio, 2007) (citations omitted). The
Ohio cases arose following removal of a state
foreclosure proceeding to federal court on the basis of
diversity; they are not bankruptcy proceedings.
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS
The servicing agent does not have standing unless
it can prove that it is a transferee, for only a person
who is the holder or transferee of the note has standing
to enforce the note – and only the holder is the real
party in interest. The servicing agent may have
authority to enforce the note if it is acting as an agent
for the holder, but the agent must act in the name of its
principal under F.R. Civ. Pro. 17. Again, all federal
lawsuits must be presented in the name of the real
party in interest. See, e.g., In re Hwang, 2008 WL
4899273 at 8.
The servicing agent must show both transferee
status and act in the name the real party in interest,
which requires the servicing agent to show that its
principal is the actual holder. See, e.g., In re Vargas,
396 B.R. 511 (Bankr. C.D. Cal. 2008) at 520.
E. A Brief Aside: Who is Mers?
For those of you who are not familiar with the
entity known as MERS, a frequent participant in these
foreclosure proceedings:
MERS is the “Mortgage Electronic Registration
System, Inc. “MERS is a mortgage banking ‘utility’
that registers mortgage loans in a book entry system so
that ... real estate loans can be bought, sold and
securitized, just like Wall Street’s book entry utility for
stocks and bonds is the Depository Trust and
Clearinghouse.” Bastian, “Foreclosure Forms,” State
Bar of Texas 17th Annual Advanced Real Estate
Drafting Course, March 9-10, 2007, Dallas, Texas.
MERS is enormous. It originates thousands of loans
daily and is the mortgagee of record for at least 40
million mortgages and other security documents. Id.
MERS cannot, by its very nature, be either the
holder of a note or the servicing agent. All MERS
does is handle recordation of the lien documents.
Supposedly, for example, the MERS entries will show
that it is the trustee or substitute trustee under a Deed
of Trust. As the cases below will reflect, however, that
is often not the case. In some situations, MERS may
not have any idea who the current holder might be.
MERS also allegedly records defaults, but the
admissibility of its records should generally be denied.
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F. Rules of Evidence – A Practical Problem
The securitization structure – with or without
MERS – also poses practical evidentiary problems
where the party asserting a right to foreclose must be
able to show a default. At In re Vargas, 396 B.R. at
517-19, Judge Bufford made a finding that the witness
called to testify as to debt and default was incompetent.
All the witness could testify was that he had looked at
the MERS computerized records. The witness was
unable to satisfy the requirements of the Federal Rules
of Evidence, particularly Rule 803, as applied to
computerized records in the Ninth Circuit. See id. at
517-20. The low level employee could only testify that
the MERS screen shot he reviewed reflected a default.
That really is not much in the way of evidence, and not
nearly enough to get around the hearsay rule. F.R.
Evid. 801.
G. Foreclosure or Relief from Stay
In a foreclosure proceeding in a judicial
foreclosure state, in a request for injunctive relief in a
non-judicial foreclosure state, or in a motion for relief
proceeding in a bankruptcy court, the courts are
dealing with and writing about these problems very
frequently.
In many if not almost all cases, the party seeking
to exercise the rights of the creditor will be a servicing
company. Servicing companies will be asserting the
rights of their alleged principal, the note holder, which
is, again, often going to be a trustee for a securitization
package. The mortgage holder or beneficiary under the
deed of trust will, again, very often be MERS.
Even before reaching the practical problem of
debt and default, mentioned above, the moving party
must show that it holds the note or (1) that it is an
transferee (agent) of the holder and that (2) the holder
(transferee) remains the holder.
Some states, like Texas, have passed statutes that
allow servicing companies to act in foreclosure
proceedings as a statutorily recognized agent of the
noteholder. See, e.g., Tex. Prop. Code §51.0001.
However, that statute refers to the servicer as the last
entity to whom the debtor has been instructed to make
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS
payments. This status is certainly open to challenge.
The statute certainly provides nothing more than prima
facie evidence of the ability of the servicer to act. If
challenged, the servicing agent must show that the last
entity to communicate instructions to the debtor is still
the holder of the note. See, e.g., HSBC Bank, N.A. v.
Valentin, 2l N.Y. Misc. 3d 1123(A), 2008 WL
4764816 (Table) (N.Y. Sup.), Nov. 3, 2008.
The Ohio judicial foreclosure cases have resulted
in a ruling that is very significant for both sides of the
argument. In a judicial foreclosure, where the debtor
objects, if the foreclosing party cannot show ownership
or authority, dismissed without prejudice. Since the
real party in interest, the owner of the note, is not
before the court, a final adjudication in favor of the
debtor is not possible. Wells Fargo Bank, N.A. v. Byrd,
897 N.E.2d 722 (Ohio App. 1 Dist, 2008).
H. Relief from Stay Proceedings
SOME RECENT CASE LAW
These cases are arranged by state, for no
particular reason.
Massachusetts
In re Schwartz, 366 B.R.265 (Bankr. D. Mass. 2007):
Schwartz concerns a Motion for Relief to pursue
an eviction. Movant asserted that the property had been
foreclosed upon prior to the date of the bankruptcy
petition. The pro se debtor asserted that the Movant
was required to show that it had authority to conduct
the sale. Movant, and “the party which appears to be
the current mortgagee…” provided documents for the
court to review, but did not ask for an evidentiary
hearing. Judge Rosenthal sifted through the documents
and found that the Movant and the current mortgagee
had failed to prove that the foreclosure was properly
conducted.
Specifically, Judge Rosenthal found that there was
no evidence of a proper assignment of the mortgage
prior to foreclosure. However, at footnote 5, Id. at 268,
the Court also finds that there is no evidence that the
5
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note itself was assigned and no evidence as to who the
current holder might be.
Nosek v. Ameriquest Mortgage Company (In re
Nosek), 286 Br. 374 (Bankr D Mass. 2008):
Almost a year to the day after Schwartz was
signed, Judge Rosenthal issued a second opinion. This
is an opinion on an order to show cause. Judge
Rosenthal specifically found that, although the note
and mortgage involved in the case had been transferred
from the originator to another party within five days of
closing, during the five years in which the chapter 13
proceeding was pending, the note and mortgage and
associated claims had been prosecuted by Ameriquest
which has represented itself to be the holder of the note
and the mortgage. Not until September of 2007 did
Ameriquest notify the Court that it was merely the
servicer. In fact, only after the chapter 13 bankruptcy
had been pending for about three years was there even
an assignment of the servicing rights. Id. at 378.
Because these misrepresentations were not simple
mistakes: as the Court has noted on more than one
occasion, those parties who do not hold the note of
mortgage do not service the mortgage do not have
standing to pursue motions for leave or other actions
arising form the mortgage obligation. Id at 380.
As a result, the Court sanctioned the local law
firm that had been prosecuting the claim $25,000. It
sanctioned a partner at that firm an additional $25,000.
Then the Court sanctioned the national law firm
involved $100,000 and ultimately sanctioned Wells
Fargo $250,000. Id. at 382-386.
In re Hayes, 393 B.R. 259 (Bankr. D. Mass.
2008):
Like Judge Rosenthal, Judge Feeney has attacked
the problem of standing and authority head on. She
has also held that standing must be established before
either a claim can be allowed or a motion for relief be
granted.
Ohio
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS
In re Foreclosure Cases, 521 F.Supp. 2d (S.D.
Ohio 2007):
Perhaps the District Court’s orders in the
foreclosure cases in Ohio have received the most press
of any of these opinions. Relying almost exclusively
on standing, the Judge Rose has determined that a
foreclosing party must show standing. “[I]n a
foreclosure action, the plaintiff must show that it is the
holder of the note and the mortgage at the time that the
complaint was filed.” Id. at 653.
Judge Rose instructed the parties involved that the
willful failure of the movants to comply with the
general orders of the Court would in the future result in
immediate dismissal of foreclosure actions.
Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL
111227 (S.D. Ohio) January 8, 2008:
In Steele, Judge Abel followed the lead of Judge
Rose and found that Deutsche Bank had filed evidence
in support of its motion for default judgment indicating
that MERS was the mortgage holder. There was not
sufficient evidence to support the claim that Deutsche
Bank was the owner and holder of the note as of that
date. Following In re Foreclosure Cases, 2007 WL
456586, the Court held that summary judgment would
be denied “until such time as Deutsche Bank was able
to offer evidence showing, by a preponderance of
evidence, that it owned the note and mortgage when
the complaint was filed.” 2008 WL 111227 at 2.
Deutsche Bank was given twenty-one days to comply.
Id.
Illinois
U.S. Bank, N.A. v. Cook, 2009 WL 35286 (N.D.
Ill. January 6, 2009):
Not all federal district judges are as concerned
with the issues surrounding the transfer of notes and
mortgages. Cook is a very pro lender case and, in an
order granting a motion for summary judgment, the
Court found that Cook had shown no “countervailing
evidence to create a genuine issue of facts.” Id. at 3.
In fact, a review of the evidence submitted by U.S.
Bank showed only that it was the alleged trustee of the
6
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securitization pool. U.S. Bank relied exclusively on
the “pooling and serving agreement” to show that it
was the holder of the note. Id.
Under UCC Article 3, the evidence presented in
Cook was clearly insufficient.
New York
HSBC Bank USA, N.A. v. Valentin, 21 Misc. 3D
1124(A), 2008 WL 4764816 (Table) (N.Y. Sup.)
November 3, 2008:
In Valentin, the New York court found that, even
though given an opportunity to, HSBC did not show
the ownership of debt and mortgage. The complaint
was dismissed with prejudice and the “notice of
pendency” against the property was cancelled.
Note that the Valentin case does not involve some
sort of ambush. The court gave every HSBC every
opportunity to cure the defects the Court perceived in
the pleadings.
California
In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal.
2008);
and
In re Hwang, 396 B.R. 757 (Bankr. C.D. Cal.
2008):
These two opinions by Judge Bufford have been
discussed above. Judge Bufford carefully explores the
related issues of standing and ownership under both
federal and California law.
II. OTHER PROBLEMS FOR THE
FORECLOSING CREDITOR
A. Servicing Company Abuses
1. Generally
Every lawyer who deals with this area understand
that there is another “elephant in the room” – servicing
company abuse and incompetence. Professor Porter
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS
has spent a great deal of time analyzing actual cases –
1,700 recent chapter 13 filings. Her conclusion was
that the majority of mortgage companies do not
comply with bankruptcy law, either inadvertently or
because they don’t know how or because they cannot.
Porter at 121.
Professor Porter’s case law examples include
Maxwell v. Fairbanks Capital Corp., (In re Maxwell),
281 B.R. 101 (Bankr. D. Mass 2002), where the
bankruptcy court stated that Fairbanks “repeatedly
fabricated the amount of the Debtor’s obligation to it
out of thin air.” The court found that Fairbanks had
imposed extreme penalty and penalty interest charges,
and high charges for forced insurance. Id. at 117-18.
Accounting errors, misapplication of payments,
miscalculation of escrows are the innocent sounding
mistakes. Porter at 134-36. Other, less innocent
events include violation of the various consumer
protection acts. See generally, Porter at 125 and
following.
The United States Trustee offices are becoming
very active in this area. See, e.g., In re Pawson, Case
No. 05-18239 (Bankr. S.D. N.Y. 2009), where the U.S.
Trustee was instrumental in forcing Chase Home
Finance LLC to enter into a consent agreement. Chase
has agreed to hire an experienced bankruptcy attorney
to review all motions for stay before filing. The US.
Trustee offices are also seeking sanctions for
substantive abuses including incorrect statements, mail
fees, fax fees, unnecessary forced insurance and the
like. Since these usually appear on proofs of claim, the
US. Trustees have invoked F.R Civ. Pro. 11 (F.R.
Bankr.Pro. 9011) to impose sanctions on counsel.
Illustrative cases include In re Beers, 2009 WL
1025402 (Bankr. N.J. 2009) and In re Cabero-Mejia,
402 B.R. 335 (Bankr. C.D. Ca. 2008).
2. The Texas and Other Fifth Circuit Cases
The following cases from the Fifth Circuit all deal
with the misconduct of the lender, the servicer, or the
attorney for one or the other:
In re Jones, 391 B.R. 577 (E.D. La. 2008).
In re Wilburn, 404 B.R. 841 (Bankr. S.D. Tex. 2009).
7
CHAPTER 17
In re Hight, 393 B.R. 484 (Bankr. S.D. Tex. 2008).
In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008).
In re Mounce, 390 B.R. 233 (Bankr. W.D. 2008).
In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008).
In re Sanchez, 372 B.R. 289 (Bankr. S.D. Tex. 2007).
In re Allen, 2007 WL 174708 (Bankr. SD. Tex. 2007).
In re Porcheddu, 338 B.R. 729 (Bankr. S.D. Tex.
2006).
Almost all of these cases involve sanctions of one sort
or another, and some are quite severe.
III. THE ETHICAL ISSUE
A. The Lender
For attorneys, the ethical framework has been
discussed above in the context of Rules 11 ad 9011 of
the Federal Rules of Procedure and Federal Rules of
Bankruptcy Procedure. But for attorneys and bankers,
the ethical issues are really deeper. Filing false,
misleading, or inaccurate claims, bad accounting
processes, sloppy bookkeeping, and the like all result
in cheating the most vulnerable – people about to lose
their homes to foreclosure. The lending industry
should fee nothing but shame. No one needs to belabor
or elaborate. This conduct is simply wrong. And,
these cases often involve the Brahmins of the banking
world, not the bottom feeders.
B. The Debtor’s Counsel
Debtor’s lawyers in chapter 13 cases, in
particular, operate on a limited budget and with limited
resources. Yet, failure to investigate and challenge the
lending community is a violation of the fundamental
ethical duty of effective representation. How does a
consumer lawyer with a fixed fee take on Mega Bank?
In part, the consumer bankruptcy practice works
because lender lawyers and consumer lawyers work
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS
things out. But, if lenders cannot be trusted, what
happens?
IV. SUMMARY
The cases, cited and Prof. Porter’s study and
article illustrate enormous problems in the loan
servicing industry. These problems arise in the context
of securitization and illustrate the difficulty of
determining the name of the holder, the assignee of the
mortgage, and the parties with both the legal right
under Article 3 and standing under the Constitution to
enforce notes, whether in state court or federal court.
These cases and Prof. Porter’s work also show that
lenders, as often as not, cheat.
Interestingly, with the exception of Judge Bufford
and a few other judges, there has been less than
adequate focus upon the UCC title issues than on the
abuses of services and lenders. The next round of
cases may and should focus upon both.
V. RECENT LEGISLATION – DOES IT MAKE
A DIFFERENCE?
8
CHAPTER 17
On May 20, 2009, President Obama signed into
law the “Helping Families Save Their Homes Act of
2009”, Pub. L. No. 111-22, 123 Stat. 1632 (the “Act”).
Section 404(a) of the Act amends the Truth in Lending
Act (“T-I-L”), 15 U.S.C. § 1641 et seq., to require any
creditor who purchases or is otherwise assigned a
mortgage loan to provide the borrower with written
notice of the transfer within thirty days. Within the
meaning of the Act, a mortgage loan includes any
consumer credit transaction that is secured by the
principal dwelling of a consumer. Act at § 404 (a)(2).
Such written notice must provide: (a) the identity,
address, and telephone number of the new creditor; (b)
the date of the transfer; (c) how to reach an agent or
party having authority to act on behalf of the new
creditor; (d) the location of the place where the transfer
of ownership of the debt is recorded; and (e) any other
relevant information regarding the new creditor. Act at
§ 404 (a)(1).
Section 404(b) of the Act creates a private right of
action against any creditor who fails to comply with
the new notice requirement. In such a private action, a
creditor may be liable for actual damages, attorney’s
fees and court costs, and twice the amount of any
finance charge in connection with the transaction. 15
U.S.C. § 1640(a) (2006). However, a creditor is not
liable if he can show by a preponderance of the
evidence that the violation was unintentional and
resulted from a bona fide error, notwithstanding the
maintenance of procedures reasonably adapted to avoid
any such error. Id. at § 1640(c). Additionally, a
creditor who willfully and knowingly fails to provide
the required disclosure may be held criminally liable
and fined up to $5,000 or imprisoned up to one year, or
both. Id. at § 1611.
While this statute might avoid some of the
problems described above, the impact will perhaps be
negligible. First, for compliance could and probably
will be limited. Second, this notice does not avoid the
central issue of identifying a holder or transferee.
Many purchasers may assume that they are holders or
transferees. Without the actual note, however, the
puzzle has no solution.
VI. NOTE ON THE MADDENING COM-
PLEXITY OF SECURITIZATION
MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
MISSING ORIGINAL NOTES AND OTHER PROBLEMS FOR CREDITORS CHAPTER 17

[A]ssume [a] CDO² held 100 CLOs,

A recent Wall Street Journal attempts to describe
the “sheer complexity” of mortgage securitization.
Scott, Kenneth E., and Taylor, John B., “Why Toxic
Assets are so Hard to Clean Up,” Wall Street Journal,
A13 (June 20, 2009). The focus of the article is on
increased transparency, which the authors argue “will
unleash the market mechanisms needed to clean … up”
these “toxic assets.”
each holding 100 RMBS comprising a
mere 2,000 mortgages [each] – the
number now rises to 20 million.
In other words, to understand the hypothetical
CDO² described above, it is necessary to review 20
million mortgages or, if tranched, the expected return
on portions of 20 million mortgages.

Whether the authors are correct about the “clean The focus of this CLE article is on the location of
up”, and transparency could be debated, the article a note. The Wall Street Journal article shows the
does an excellent job of describing the securitization difficulty of locating the actual assets – the notes – that
process. have been securitized.

For home loans, the wizards on Wall Street

created “residential mortgage-backed securities”
(RMBS). Large numbers of residential mortgages
were placed into a pool, or rather, to be more accurate,
the notes secured by those mortgages are pooled.
These pools were then “sliced” into “tranches” based
upon potential returns, and the tranches were sold
separately. The tranches were treated as if each
tranche was a separate or new instrument. The
equivalent tranches of several pools might be sold as
“Collateralized Mortgage Obligations” (CMOs)(these
are bonds) or the tranches might be combined with
other tranches of other types of debt, including
commercial mortgages, student loans, etc., called
“Collateralized Loan Obligations” (CLOs). When
CMOs and CLOs were combined, the result was
referred to as a Collateralized Debt Obligation (CDO).
When two or more CDOs were combined, the result
was called a CDO².

In this scheme, the title to the individual notes

should remain in the hands of an indenture trustee for
the original pool, and the indenture trustee for the
bonds actually sold to investors (based upon the CDO
or CDO²) would only own an interest in a portion of
each of the underlying notes.

The Wall Street Journal article focuses on the

difficulty of determining the value of these complex
pools of assets to determine the value of the bonds
after issuance, analysis of a potentially massive
number of underlying assets must be analyzed: